War Is Hell—but Not for The Stock Market

The stock market tends to rally whenever the U.S. begins military operations overseas.

Does that mean that investors prefer war? Not exactly. But they positively abhor uncertainty, and that’s what typically characterizes the market environment in the weeks prior to the U.S. military becoming involved in a foreign military operation.

Much of that uncertainty gets resolved soon after U.S.-led hostilities begin, and that’s why the stock market typically soars in response.

This interaction between the stock market and uncertainty is key to understanding what’s going on now, with the markets struggling over the past couple of weeks in reaction to U.S. saber-rattling directed at North Korea and Syria. The Dow Industrials are 2.6% below where they stood on March 6, which is when North Korea launched four missiles into the Sea of Japan.

That uncertainty appeared to lessen this past weekend with the failed North Korean missile launch, though it quickly returned: Vice President Mike Pence said in a speech in South Korea that the era of “strategic patience” with North Korea was over, and a White House official was quoted to the effect that Trump was considering a “kinetic” action—including a sudden strike—against that country.

Meanwhile, in a development reminiscent of the dark days of the Cold War, U.S. fighter jets intercepted two Russian bombers off the Alaskan coast. That move comes after the U.S. bombed a military air facility in Syria, a close Russian ally.

This period of market weakness is likely to continue so long as uncertainty remains elevated. That could last for months. But a shrewd contrarian bet would be for a sharp rally if and when U.S.-led hostilities commence.

Consider how the Dow Jones Industrial Average has performed both before and after the U.S. military became engaged in past foreign hostilities. We focused on seven discrete events since the early 1980s:

• The U.S. invasion of Grenada (1983)

• The U.S. invasion of Panama (1989)

• The first Gulf War (1991)

• The U.S. bombing of Kosovo (1999)

• The U.S. war on Afghanistan (2001)

• The second Gulf War (2003)

• The U.S. bombing of Libya (2011)

This isn’t an exhaustive list of all of the U.S. military’s overseas activities of the past four decades. But each of these seven had a well-defined beginning date that allows us to measure how the stock market did in the weeks prior to those hostilities and thereafter. Other U.S.-led hostilities, such as the so-called war on the Islamic State, have had no such well-defined beginnings.

On average over the month prior to the beginning of these seven events, the Dow fell 0.6%, or 1.4 percentage points lower than the average of all months since 1983 (see chart). But this underperformance was…